One of the most important, yet most over-looked, aspects of estate planning in Texas is the effective coordination of the various aspects of your Texas estate plan.

Texas estate planning can involve various tools:

In addition, an estate plan could involve large Non-Probate Assets like:

  • Life Insurance
  • Retirement Plans
  • Payable on Death Accounts
  • Joint Tenant with Rights of Survivorship Accounts

At its most basic, effective estate planning involves passing the largest amount of assets from one generation to another while paying the least estate taxes and protecting the assets from creditors.

In order to ensure that each of these objectives is accomplished, your estate planning attorney will generally develop a comprehensive plan for accomplishing these goals.

Different assets are treated differently. Some assets pass under a Will while others pass outside the Will by beneficiary designation. Some assets trigger large income taxes when they are paid out, and other assets do not trigger any income tax. Some assets may have restrictions precluding easy transfer, and other assets have no such restrictions. Some assets are easy to value, while other assets are extremely difficult to value.

Given the wide variety of differences between the assets that may be included as part of an estate, it is vitally important that an effective estate plan coordinate the disposition of all of the assets and not ignore the characteristics of anything owned by the Testator.

Example: Husband and Wife are married and have a combined estate of $5 million, which is comprised of $2 million in life insurance on Husband’s life (naming Wife as the beneficiary), a retirement account in Husband's business valued at $2.5 million (naming Wife as the beneficiary) and a home valued at $500,000. In 2006, Husband dies leaving a Will that includes a Bypass Trust for the benefit of his Wife, and upon her death to their 3 children. (Remember, a Bypass Trust is created under the Will at death and is funded with the estate tax exemption amount of $2 million in 2006).

Texas Estate Planning Example: Husband and Wife created Wills with Bypass Trusts to take advantage of the tax-savings of the Bypass Trust. Accordingly, $2 million of the assets in Husband's estate (passing under the Will) should be placed in the Bypass Trust. However, Husband and Wife failed to adequately coordinate their assets and estate plan. The life insurance and the retirement plan both have beneficiary designations and pass outside the Wills. Therefore, they cannot be used to fund the Trust established under the Will. Accordingly, those assets will pass directly to Wife, rather than going into the Bypass Trust, which ultimately will cost Husband and Wife a significant amount of taxes.

If this estate had been properly coordinated, Husband and Wife would have been able to exempt a total of $4 million from estate taxes between the two of them (each of them would enjoy a $2 million exemption from estate taxes). If properly accomplished, only $1 million would have been subjected to estate tax, which would have cost them approximately $500,000. However, because of the improper coordination, the entire estate is going to be subject to estate taxes, which is going to cost them approximately $2.5 million in estate taxes.

As a result of the improper coordination of the assets, Husband and Wife paid approximately $2 million more tax than they would have had to if they had properly coordinated their assets and estate plan.

The proper coordination of the various estate planning tools and assets of an estate is critical to reducing the taxes paid as a result of someone's death. Additionally, the proper coordination of the estate plan can help to ensure that the proper individuals receive Husband and Wife’s assets, rather than unintended beneficiaries receiving unintended benefits.

Ford+Bergner LLP considers the proper coordination of the estate plan of the utmost importance to our clients. As a result, we attempt to gather comprehensive information regarding the assets and intended dispositions of our estate planning clients so that we can properly advise them on the most effective methods of estate planning. Please contact us if you are interested in having us assist you with your comprehensive estate plan.